Overview of Main Tax Instruments
Corporate Income Tax
The federal government, the ten provinces, and the three territories all levy a tax on corporate income. The Canadian income tax system establishes income tax liability based on two concepts: type of income sources and residence.
Types of Income Sources
Canadian income tax law (both federal and provincial/territorial) recognizes four main types of income sources: business, property, employment, and capital gains. Income from a property source connotes passive income (such as rent, interest, royalties, and dividends) earned through investment (as opposed to business) activities.
Residence of a Corporation
In determining whether a person is resident in Canada, Canadian concepts of residence generally apply. However, the application of the residence concepts is subject to the rules in effect in bilateral income tax treaties.
A corporation will generally be resident in Canada if it has been incorporated in Canada. A corporation that has been incorporated in a foreign jurisdiction will be considered a Canadian resident if its central management is located in Canada. The central management and control of a corporation is generally located in the country in which key business decisions are made.
Canadian resident corporations are taxed federally on their worldwide income regardless of their geographic source. Due to Constitutional restrictions, the provinces and territories levy an income tax only on income earned in the province or territory. Income that is not earned in a province or territory is not subject to provincial or territorial income tax, but is subject to a higher rate of federal income tax. If a Canadian resident corporation earns income from a source outside Canada, it will generally be entitled to a tax credit, applicable to its otherwise payable Canadian corporate income tax, for some or all of the foreign tax paid. Canadian income tax imposed on non-resident corporations is restricted to Canadian-source income.
The Income Tax Act (ITA) contains two main forms of income taxes and several forms of other minor taxes. Of most relevance to mining are Parts I and XIII of the ITA. Part I of the ITA imposes a tax on net income. It applies to all income earned by Canadian residents regardless of types of income source. Part I tax also applies to non-residents, but only insofar as they earn income from Canadian employment or business activities or realize capital gains in respect of certain types of Canadian assets.
Part XIII of the ITA (also referred to as the withholding tax) imposes a tax on gross income with no provision for deductions. It applies principally to property income earned by non-residents and to certain administration and management fees that are paid to non-residents.
Federal income tax rules specific to mining are presented under the subsection on Mining-Specific Tax Provisions. Income tax rates that currently apply for the federal income tax and the provincial/territorial income taxes are presented in Tables on the Structure and Rates of Main Taxes.
The federal government, in addition to collecting federal income tax, collects the corporate income taxes levied by eight of the provinces and by the three territories. Alberta and Quebec administer their own corporate income tax systems.
Taxable income is computed similarly by all jurisdictions, including those with a separate tax administration. With relatively minor variations, the tax rate of the provinces and territories can approximately be applied to the computation of income for federal corporate income tax purposes.
Non-residents that are not subject to Part I income tax must pay a withholding tax (Part XIII tax) on the gross amounts of enumerated types of Canadian-source property (i.e., passive investment) they receive from, or get credited for by, Canadian taxpayers. The rate of the withholding tax that applies varies according to the country of origin of the non-resident. The general rate is 25%. It is lower for a non-resident of a country with which Canada has signed a tax treaty. The extent of Canada's tax treaty network is discussed in the section covering the Canadian tax regime in the context of the global economy, under the subsection on Canadian International Income Tax Rules.
Mining Taxes and Crown Royalties
All provinces and territories with significant mining activities impose mining taxes and/or mining royalties or mineral land taxes on mining operations within their jurisdictions. This is a third level of taxation, separate and distinct from federal and provincial/territorial income taxes. These mining levies are intended to compensate the province or territory for the extraction of non-renewable resources owned by it.
Essentially all provinces and territories impose mining taxes on defined mining profits. The mining taxes are conceptually levied on profits derived from the operations at the mining stage only. Practically, since no fair market value of production can reasonably be established at the mining stage, the starting point of the tax computation is generally the profits from both mining and processing operations, usually with the deduction of a processing allowance (except in British Columbia, Alberta, Saskatchewan, and Prince Edward Island) that removes from taxable profits a given return on the investment in processing assets. The processing allowance is computed as a given percentage (representing the allowed rate of return on processing investment) of the original cost of the processing assets. There are provisions that the allowance cannot exceed a stated percentage (usually 65%) of the combined mining and processing income calculated before the processing allowance. In some cases, a minimum percentage of mining and processing profits is allowed when this calculation yields a higher deduction than the one given by the application of the allowed percentage of the processing asset cost.
Each of the statutes permits a deduction (at varying rates) for the depreciation of mining and processing assets and for the amortization of pre-production expenses. However, none of the statutes allow a deduction for the cost of the mineral property, the exploration expenses carried out outside the province, and depletion or interest expenses. Only New Brunswick and Newfoundland and Labrador allow a deduction for non-Crown royalties because these two provinces tax the recipient of such royalties. British Columbia is the only jurisdiction that currently provides relief for operating losses of prior years.
A table illustrating a typical calculation of mining taxes for the provinces and territories that permit the deduction of a resource allowance is presented below.
|Year X||Year X+1||Year X+2||Year X+3|
|Net income||2 000||2 000||2 000||1 000|
|0||1 800||1 400||1 000|
1 Model assumptions:
- Initial capital cost of processing assets = $10 million.
- Non-depreciated capital cost = $1 million at the beginning of Year X.
- Processing allowance is the minimum of 8% of the original cost of the processing asset and 65% of the income before the processing allowance.
Common Approaches and Main Variations of the Canadian Mining Tax Regimes
The common approaches include:
- Mining taxes are mainly profit-based;
- Mining and processing assets are depreciable;
- Exploration expenses are at least 100% deductible;
- Most provinces/territories have processing allowance; and
- Interest, depletion, and cost of the mining property are not deductible.
The main variations include:
- Tax structures vary from a single rate to two-tier rates and sliding-scale tax rates;
- Depreciation method vary from straight-line to declining balance;
- Some offer cost of capital allowance; and
- Mining tax in some provinces/territories are commodity-specific, for example:
- Alberta: metallic vs. industrial minerals,
- Saskatchewan: metallic vs. potash vs. uranium, and
- Ontario: metals vs. diamonds.
Taxes on Goods and Services, and Sales Taxes
Goods and Services Tax
A 5% value-added tax, called the goods and services tax (GST), is charged on the supply of goods and services within Canada where such supplies are not exempt or subject to a zero rate of tax. The GST is charged on imports, but exports are zero rated. Exempt categories are groceries, most medical services and devices, prescription drugs, and residential rents. The GST applies at each stage of the production and distribution chain. To ensure that the tax applies only once to the final consideration paid for consumer expenditure, registered businesses are entitled to credits for tax paid on inputs into making taxable supplies.
Since 1996, a single harmonized value-added tax, the HST (harmonized sales tax) has replaced the provincial retail sales taxes and the federal GST in Nova Scotia, New Brunswick, and Newfoundland and Labrador. The rates of HST for the three provinces are all 15%. Effective July 1, 2010, Ontario harmonized its PST (8%) with the federal GST (5%). Its HST rate is presently 13%. Furthermore, on April 1, 2013, Prince Edward Island harmonized its provincial sales tax with the GST. Its current HST rate is 15%. For more information on the GST and the HST, visit the Canada Revenue Agency's GST/HST for Businesses web page.
Under an agreement between the federal and Quebec governments, Revenu Québec is responsible for administering the GST/HST in Quebec. The current Quebec sales tax (QST) is 9.975%.
A sales tax is applied as a percentage of the final purchase price of a good or service when it is sold.
No sales tax is imposed at the federal level. At the provincial level, sales taxes are applied only in British Columbia (7%), Manitoba (8%) and Saskatchewan (6%).
Customs duties are taxes that are levied upon goods and services that are imported into Canada. They are regulated by the Canada Border Services Agency.
Both the federal and provincial/territorial governments impose excise taxes on motor fuels, such as diesel and gasoline. The current federal rates are 11 cents per litre for leaded gasoline, 10 cents per litre for unleaded gasoline, and 4 cents per litre for diesel and aviation fuel. For more information, see Current Rates of Excise Taxes on the Canada Revenue Agency web site.
Property taxes are direct taxes that are imposed by municipalities or regional governments. They are normally applied as a percentage of the assessed value of land, buildings, and other real estate. The assessed value for determining the property tax amount may be determined by a number of different factors, including acquisition cost and fair market value. The portion of property taxes imposed on property that is used to earn income is deductible from income in the determination of corporate income tax.
Other Taxes and Levies
A detailed description of payroll levies can be found at the CRA web site: Payroll.
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